Monday June 11 2018

In Summary

This first article of a three-part series puts into context the quantity of East Africa’s bounty, to show the significance, if any, of its resources to the rest of the world.

The six eastern Africa nations are small players in the global petroleum extraction and marketing league. This is essential to note especially after establishing the fact that crude petroleum reserves are liberally distributed globally.

The second part of this three-part series will be on the extraction economics for East Africa and the third will examine the potential for regional development.

The recent commencement of Kenya’s Early Oil Pilot Scheme confirms the country’s quest to join petroleum producing and exporting nations.

Comprising the latest entrants into the ranks of petroleum oil and natural gas endowed nations, Kenya, Tanzania and Uganda are touted by some to be on the verge of an economic revolution.

This first article of a three-part series puts into context the quantity of East Africa’s bounty, to show the significance, if any, of its resources to the rest of the world.

For the purpose of this analysis, we defined East Africa as comprising Ethiopia, Kenya, Uganda, Rwanda, Burundi, South Sudan and Tanzania.

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British petroleum economists make technical distinctions between different measures of reserves. “Proved reserves” is the term used to refer to reserves that are geologically recoverable under current economic and operating conditions.

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In other words, reserves that do not demand highly specialised techniques and technologies to extract and whose extraction leaves a reasonable margin of profit under “current” oil.

The absence of accurate statistics on Kenyan and Ugandan oil bounties on public databases of major oil producers like British Petroleum and information collecting agencies, perhaps bears testament to the novelty of those discoveries if not their triviality to total global reserves.

Quotations of Kenya’s and Uganda’s reserves are based on recent press releases and best estimates by exploration firms and scant government sources.

Proved Reserves at Global, Continental and Regional Levels

The quantity of proved oil reserves, rate of production and reserves to production ratio are the major variables that allow for the oil bounties of different regions and nations to be compared in a sensible manner.

Economic factors driven by market conditions, technology and geology of an area determine the quantum of a “proved reserve.”

On a global scale, every continent is endowed with a considerable bounty of oil.

Of the world’s 1.706 trillion barrels of proved oil reserves, the Middle East’s 813.5 billion barrels comprises 47.7 per cent of all proved reserves making this region the wealthiest in crude oil endowment.

Venezuela’s oil fields are the largest held by a single nation. That nation bears 300.9 billion barrels, making up 91.76 per cent of South and Central America’s total proved reserves and 17.6 per cent of the global share of proved oil reserves on the globe.

The world’s 1.706 trillion barrels of proved oil reserves amounts to 36,461 litres of unrefined crude for every living human based on 2017 population.

Finally, it is estimated that at the current average rate of production, global oil reserves will last another half century before they are depleted.

Though concentrated in the Middle East and South and Central America – regions that hold 66.9 per cent of proved oil reserves globally – oil is not a resource unique to any particular region of the world.

Africa’s endowment of 128 billion barrels is remarkable when it is noted that Libya’s 48.4 billion barrels is roughly equal to the endowment of the whole Asia Pacific region. That is to say, Libya and the Asia Pacific each equally hold 2.80 per cent of the world’s proved oil reserves.

South Sudan, Kenya and Uganda are the only East African nations with proved oil reserves. For scale, this region’s 10.754 billion barrels amounts to 22.23 per cent of Libya’s endowment and a mere 0.63 per cent of all the proved reserves in the world.

By virtue of the small size of its proved reserves – reserves that have yet to begin being sold in the market – oil discoveries in East Africa are not significant on the global map.

Stated differently, the six eastern Africa nations are small players in the global petroleum extraction and marketing league. This is essential to note especially after establishing the fact that crude petroleum reserves are liberally distributed globally.

As possessors of crude petroleum oil fields, Kenya and Uganda will join South Sudan as oil producers but they are all not entering an elite club. (See table 1)

Production

The rate of production of an oil field is indicative of its potential as determined by the market. A large proved oil reserve attracts large investments.

Conversely, the larger proved reserve lends itself to higher rates of production before the point of depletion is reached. The rate of production is thus a determinant of the lifespan of an oil reserve.

In 2016, the world produced an average of 92.2 million barrels of crude oil a day. Predictably, the Middle East led in rate of crude production, extracting 34.5 million barrels of crude a day.

In that same year, the United States edged out Saudi Arabia as the leading national oil producer in the world, extracting crude at a rate of 12.35 billion barrels a day compared with Saudi Arabia’s 12.349 billion barrels a day. They each averaged 13.41 per cent and 13.40 per cent respectively of the global petroleum production for 2016.

In comparison, continental Africa produced 7.892 million barrels a day. South Sudan averaged 118,000 barrels a day while Kenya and Uganda hope to begin their own operations at the modest rates of 80,000 and 60,000 thousand barrels a day respectively.

At present day rates of production, the world’s oil bounties will all be depleted within half a century. When compared discretely, South and Central America’s reserves have the longest lifespan at 119.9 years based upon their present extraction rates.

On a national level, it is estimated that US reserves will be depleted in 10.6 years while Canadian reserves ill deplete in 105.1 years.

At 80,000 barrels a day, Kenyan reserves will be depleted in just under 25 years. Uganda’s and South Sudan will see depletion in 296.80 and 27 years respectively, based on the extraction rates that have been declared.

This goes to show that despite being the latest entrants into the global oil market, the eastern Africa countries together will not affect general supply of oil to the world market.

Reasoning from the facts, the region has far too little reserves to get invitation into that price-fixing cartel of Organisation of Petroleum Exporting Countries, where the countries with the largest reserves co-ordinate market activity to maintain supply and determine prices.

The range of future rates of production can be predicted by the size of the proved reserve which will itself drive the scale of investment in a given reserve.

As South Sudan’s’ proved reserves are higher than Kenya’s, it is likely and possible for South Sudan’s rate of production to remain higher than Kenya’s.

Based on the statistics released by the government of Uganda, it’s 6.5 billion barrels of proved reserves may attract the highest investment in the region, giving Uganda a higher production rate than its neighbours.

Based on its chosen rate of extraction, it appears that a choice may have been made to stretch the lifespan of these reserves instead of depleting them sooner. OPEC nations are price setters and can fix their rates of oil production.

For East African nations, however, the markets will decide the rates that these reserves should be extracted. (See table 2)

Oil supply and demand statistics vary due to inescapable differences in definition and measurement of information.

Stock changes or variations between national strategic oil reserves maintained for strategic economic and political reasons and oil purchased on the markets will also influence the difference in oil supply and demand statistics.

For these reasons, British Petroleum states that in 2016, the world produced 92.150 million barrels of crude oil daily while consuming 96.6 million barrels in the same year.

Energy demand in a modern economy is driven by the intensity of industrial activity, the number of vehicles in a country and the size of an economy and income of its people. These four factors are useful predictors of the demand of petroleum oil.

The Asia Pacific region registered 34.77 per cent of the world’s share of crude oil consumption. The Asia Pacific is therefore the most oil-thirsty region on the globe and this is no surprise since the industrial giants that are China, India, Japan and South Korea are all based here. North America follows with 24.7 per cent of total world consumption.

Seen in different terms, Asia Pacific nations consumed 33.58 million barrels of oil per day to North America’s 23.843 million barrels.

On a national level, the United States was the most intensive user of oil, consuming 19.63 million barrels of oil, or 82 per cent of North America’s total and 20.3 per cent of the world’s total oil.

As an oil producer, the US enjoys low fuel prices compared with other nations with its equivalent income levels so that its citizens are incentivised to use high amounts of fuel in transportation. Notably, the US oil industry enjoys wide ranging subsidies.

Saudi Arabia’s geographical size and its position as an oil producer also helps explain its sixth place ranking among the largest consumers of crude oil.

Africa accounted for 4.1 per cent of global consumption or 3.937 million barrels of crude oil. In Africa, Egypt, Algeria and South Africa account for 46 per cent of continental consumption of crude oil, being also among the largest economies on the continent.

Egypt consumed 8.53 million barrels or 0.9 per cent of the world total while it bears 1.3 per cent of the world’s population.

Though their economies are roughly equal in size and Ethiopia’s population is larger than Kenya’s, the latter boasts a larger industrial base and more motor vehicles per capita.

Nairobi alone has more cars than the whole of Ethiopia and this explains a large part of the disparity in oil consumption in Kenya’s favour.

Gas supply quantum

Geologically speaking, the processes that form oil and gas are similar. In the cavernous underground spaces in which deposits of oil are found, gas forms what is termed a gas cap on the oil, coalescing above the oil due to its lighter properties.

The extraction processes are dissimilar, however. Nigeria flares a large amount of its gas deposits during oil extraction. Notably, oil and gas deposits will not always be found in proportions equal to each other.

Tanzania’s large finds in gas in Lindi for example, are not accompanied by crude oil. Gas is used to generate electric power; for industrial purposes such as manufacturing of plastics; for domestic use e.g. cooking, heating; for fertiliser production and as fuel for specialised vehicles in the transport sector. (See table 3)

Every world region has gas in different quantities. In 2016, global gas reserves stood at 186.6 trillion cubic metres.

Similar to its endowment with crude petroleum, the Middle East and the Persian Gulf area has the largest gas deposits, constituting 42 per cent of the world’s total. At 5 per cent North America has the smallest share of global reserves.

On a national level, Iran holds the world’s largest proved reserves of gas with 33.5 trillion cubic metres. That amounts to 18 per cent of global proven reserves.

At the current rate of production, it will take Iran 165.5 years to deplete its endowment.

Other countries with substantial reserves are Saudi Arabia, the United Arab Emirates, the Russian Federation, Turkmenistan and Qatar at 65.5 per cent (122.1 trillion cubic metres) of the world’s current reserve.

As part of the larger energy industry, the scale of investment and the size of reserve are positively correlated.

Common drivers for the demand of natural gas as an energy source include economic activity, extreme winters, regulations incentivizing transition towards clean forms of energy, the price of gas and political considerations.

In the recent past, frosty relations between Russia and the United Kingdom for example, affected the supply, price and conversely demand for gas in parts of Europe and the Mediterranean.

Europe and Eurasia, and North America have consumption rates that are higher than the other continents at 29 per cent and 27 per cent respectively.

The main producers of natural gas in terms of trillion cubic metres are: US (0.7), Russia (0.6), Iran (0.2), Qatar (0.2) and China (0.1). Those nations account for 52 per cent of the world’s total production of 3.6 trillion cubic metres.

In national terms, the largest consumers of gas are the US (0.7786), Russia (0.3909), Iran (0.2008), China (0.2103) and Japan (0.112) at 47.7 per cent (0.16926 trillion cubic feet) of the world’s total consumption of 3.5 trillion cubic metres of gas. Global demand is seeing a growth rate of 1.5 per cent annually, proving that petroleum fuels are still the dominant mode of non-solid fuels in the world. At the current rate of production to meet demand, the world will deplete its natural gas resources in 52.5 years.

Africa has proved reserves that stand at 14.3 trillion cubic feet with a life span of 68.4 years. This gives Africa a share of 7.6 per cent of the total world reserves for gas.

Within Africa, Nigeria holds the largest gas reserves at 186.6 trillion cubic feet (2.8 per cent of the world’s share) that will be depleted in approximately 117 years at their current rate of production of 44.9 billion cubic feet per year.

Algeria on the other hand takes on the second largest at 159.1 trillion cubic feet (2.4 per cent of the world’s share) that will be depleted in a little less than half a century.

The major producers in Africa are Nigeria (0.0449), Libya (0.0101), Egypt (0.0418) and Algeria (0.0913), producing a total of 0.1881 trillion cubic feet of gas cumulatively which is 5.4 per cent of the world’s total production.

Africa’s production rate is however decreasing at a rate of 1.1 per cent per annum. Africa’s consumption rate is at 138.2 billion cubic metres at a growth rate of 1.4 per cent. It would take Africa 68 years to completely deplete its reserves.

Africa has been lagging behind in the extraction of natural gas despite discoveries of vast amounts of it that can be found in different parts of the continent, with the most recent discoveries being made in Mozambique and Tanzania.

In East Africa, Kenya, Uganda, South Sudan and Rwanda also have some insignificant quantities of natural gas. (See chart)

Conclusion

East Africa’s discovery of oil does not rank it amongst uniquely endowed nations, nor does the quantity of oil suggest that those discoveries will make a significant impact on the world market.

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The second part of this three-part series will be on the extraction economics for East Africa and the third will examine the potential for regional development.